WASHINGTON -(Dow Jones)- Credit default swaps aren't to blame for Greece's rapidly escalating debt troubles, a top official from the International Swaps and Derivatives Association will tell U.S. lawmakers Thursday.
Robert Pickel, executive vice chairman of the trade group, will tell a House panel that trading in Greek CDSs is too small to make a dent in the market for the country's government bonds--and could even help shore up confidence in Greek sovereign debt.
"Over the past several months, the use of sovereign CDS has received scrutiny as some have suggested trading in sovereign CDS could be responsible for putting pressure on government bond markets. The data suggest otherwise," Pickel said in prepared remarks for a House Financial Services subcommittee hearing on the impact of CDSs in Greece's debt crisis.
Spreads of Greek CDSs have soared to record highs in recent days amid concerns about whether the joint European Union-International Monetary Fund rescue fund under discussion will be enough to stem the country's debt implosion.
Speculation in CDSs, which allow investors to insure against the default of debt issuers, has been blamed for exacerbating the turmoil in Greek bonds. The European Commission is considering an outright ban on so-called "naked" CDSs, where those taking out the insurance don't hold the underlying debt, while the U.S. Senate is nearing a vote on a bill that would force much of the market onto trading platforms.
In announcing the hearing, Rep. Paul Kanjorski (D., Pa.) said Greece's situation could hold "important implications for the issuance of all government debt, especially when bankers act as casino operators by first helping governments to issue bonds and then facilitating bets against the failure of that debt."
But the ISDA's Pickel said the fact that the net volume of Greek CDSs amounts to just 2% of outstanding Greek bonds "reflects the overall role of derivatives generally, to adjust risk positions at the margin."
At the end of September 2009, there was a net $8.3 billion in Greek CDSs outstanding, versus $426.8 billion in government debt. Globally, the $196 billion in net sovereign CDSs amounts to about 0.5% of sovereign debt, according to the ISDA.
"At the same time, for large investors, the mere availability of CDS gives them more confidence to take on bond positions, since they can use CDS in the future to hedge against emerging or unforeseen risk," he said.
Pickel also defended trading in naked CDSs, saying the majority of investors "likely are hedging legitimate economic risks, not speculating, even if they do not own the actual asset referenced in the CDS."
Copyright 2009 Dow Jones Newswires
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